Ignore McDonald's Second Quarter Earnings Blunder, and Focus on the Long Term
McDonald's (MCD) - Get Report stock plunged more than 4% Tuesday, following weaker-than-expected, second-quarter same-store sales.
But the drop presented investors with an excellent opportunity to pick up shares at a discount.
McDonald's is a solid investment, and its earnings miss reflects overall weakness in a restaurant sector that is bound to improve. The company's overseas' growth has been impressive.
To be sure, same-store sales in the U.S. rose just 1.8%, missing Wall Street's expectation of 3.6% by a wide margin and down from a 5.4% rise in the first quarter.
But analysts were quick to point out that the second quarter's weakness came courtesy of the first quarter's greatest strength: the all-day breakfast.
Since the all-day breakfast was introduced in October, it has been hailed as a triumph for the Golden Arches and for growth-minded Chief Executive Steve Easterbrook, and it has delivered profits.
He has been trying, since he took the helm in March 2015, to reinvent and revamp McDonald's business.
The burger and fries giant was suffering as fast-casual eateries such as Chipotle Mexican Grill and Panera Bread won increasing favor among diners. Fast casual promises food delivered as quickly as Big Macs but with ingredients that the public perceives as being healthier and even gourmet, in some cases.
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The all-day breakfast has been overwhelmingly successful, perhaps too successful. Customers have been gobbling up McGriddles and other breakfast foods, but they have been doing so at the expense of other, pricier menu items.
"Average transaction values for lunch and dinner have fallen as a consequence [of cheaper menu items], something that has put a damper on overall sales growth, even if it has been helpful to volumes," Neil Saunders, chief executive of research firm Conlumino, wrote in a report. "In most markets the pricing differential between breakfast items and lunch and dinner items is fairly pronounced, and this may be something McDonald's needs to assess over the next six months to see if there is any way to remedy the down-trading trend without losing customers."
But McDonald's is blaming current events, as well as warning of continued sluggishness due to weakened financial security.
"Whether through elections or global events, people are mindful of the unsettled world. When families are uncertain, caution prevails," Easterbrook said.
In the long run, McDonald's is a sterling blue-chip stock.
McDonald's is an international corporation that is built to last and adapt. The company has plans to continue taking on higher-priced rivals such as Shake Shack with tweaks to its menus and ingredients.
And the company also continues to profit from international sales. Same-stores sales in its so-called foundational markets, comprising 100 countries including Japan, jumped 7.7% for the quarter.
The U.S. restaurant sector as a whole is under-performing, with weaker-than-expected results recently from both Yum! Brands and Starbucks.
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McDonald's remains one of the best companies in the industry, with the earnings miss still representing the fourth consecutive quarter of gains.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.